Post by jeffolie on Oct 18, 2007 15:49:41 GMT -6
Treasuries Rise in Longest Rally Since August on Credit Rout
By Sandra Hernandez and Deborah Finestone
Oct. 18 (Bloomberg) -- Treasuries rose for a fourth straight day after trading losses at Bank of America Corp. renewed concern that a credit-market rout may deepen, threatening economic growth.
The longest rally in U.S. government debt since August pushed yields lower for all maturities as investors sought shelter in the safest of securities. In another sign that investors are paring risk, yields on Treasury bills tumbled for a third day, causing the difference between the interest that banks and the U.S. government pay for three-month loans to increase to 1.45 percentage points, the widest since Sept. 28.
``The market believes the housing and subprime mess is going to take us to recession,'' said Charles Comiskey, head of U.S. government bond trading in New York at HSBC Securities Inc., one of the 21 primary securities dealers that trade directly with the Fed.
The yield on the two-year note fell 5 basis points, or 0.05 percentage point, to 3.94 percent at 1:56 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 percent security due in September 2009 rose 3/32, or 94 cents per $1,000 face amount, to 100 1/8.
Futures traded on the Chicago Board of Trade suggested a 68 percent chance that the Fed will reduce the target rate for overnight lending between banks a quarter-percentage point on Oct. 31, compared with 54 percent odds yesterday and a 40 percent likelihood a week ago.
``The credit story has reignited itself,'' said Sean Murphy, a trader in New York at RBC Capital Markets.
Bank of America
Earnings at Bank of America, the second-largest U.S. bank, fell 32 percent after trading losses, defaults and writedowns cost almost $4 billion. Citigroup Inc., the biggest U.S. bank, on Oct. 15 reported a 57 percent decline in profit and said consumer lending will deteriorate this year.
Credit markets froze in July when the collapse of subprime mortgage trading led investors to shun bonds linked to home loans as well as debt for leveraged buyouts and commercial paper.
Two-year note yields have fallen about 30 basis points this week. The last time they had a bigger drop was in the week ended Sept. 2, 2005, when traders speculated the Fed would cut rates in the aftermath of Hurricane Katrina.
``Everyone's jumping into a flight to quality and into the short end,'' said Michael Franzese, head of government bond trading in New York at Standard Chartered. ``Bank of America's report sent everyone into a tizzy.''
Steepening Curve
The yield on the 10-year note fell 4 basis points to 4.52 percent, a four-week low. Yields move inversely to bond prices.
The note yields 58 basis points more than two-year notes, the widest since Sept. 28. A steepening in the so-called yield curve is further indication that investors expect the Fed to cut rates and are increasing their demand for short-term maturities.
Three-month bill yields fell 23 basis points to 3.76 percent, the lowest since Sept. 28. The Treasury today announced plans to sell $18 billion of the notes on Oct. 22. The offering is $2 billion more than the previous week.
In a sign that investors are concerned that the credit crisis may be spreading, the difference between three-month bill yields and the three-month London interbank offered rate increased for a third day to 145 basis points. The difference averaged 39 basis points in the first seven months of the year before reaching 240 basis points on Aug. 20, the highest since the stock market crashed in 1987.
Stocks Fall
Investors also sought the safety of government debt as the Dow Jones Industrial Average and the Standard & Poor's 500 Index fell and the risk of owning corporate bonds rose. The CDX North America Investment Grade Series 9 Index, a measure of the cost to protect bonds from default, climbed 3.5 basis points to 55.5 basis points, according to broker Phoenix Partners Group.
U.S. two-year notes yesterday rallied the most in five weeks after S&P cut ratings on $23.4 billion of mortgage securities and Deloitte & Touche LLP said a structured investment vehicle of London-based hedge fund Cheyne Capital Management Ltd. will stop paying debts.
``The whole credit situation is going to take over a year to play itself out, and we're only a few months into it,'' said Andrew Harding, who helps manage $16 billion as chief investment officer for fixed income in Cleveland at Allegiant Asset Management.
The two-year note's yield will be 4.03 percent by year-end, according to a Bloomberg News survey of 72 economists, with the most recent forecasts given the heaviest weightings.
To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net ; Deborah Finestone in New York at dfinestone@bloomberg.net .
By Sandra Hernandez and Deborah Finestone
Oct. 18 (Bloomberg) -- Treasuries rose for a fourth straight day after trading losses at Bank of America Corp. renewed concern that a credit-market rout may deepen, threatening economic growth.
The longest rally in U.S. government debt since August pushed yields lower for all maturities as investors sought shelter in the safest of securities. In another sign that investors are paring risk, yields on Treasury bills tumbled for a third day, causing the difference between the interest that banks and the U.S. government pay for three-month loans to increase to 1.45 percentage points, the widest since Sept. 28.
``The market believes the housing and subprime mess is going to take us to recession,'' said Charles Comiskey, head of U.S. government bond trading in New York at HSBC Securities Inc., one of the 21 primary securities dealers that trade directly with the Fed.
The yield on the two-year note fell 5 basis points, or 0.05 percentage point, to 3.94 percent at 1:56 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 percent security due in September 2009 rose 3/32, or 94 cents per $1,000 face amount, to 100 1/8.
Futures traded on the Chicago Board of Trade suggested a 68 percent chance that the Fed will reduce the target rate for overnight lending between banks a quarter-percentage point on Oct. 31, compared with 54 percent odds yesterday and a 40 percent likelihood a week ago.
``The credit story has reignited itself,'' said Sean Murphy, a trader in New York at RBC Capital Markets.
Bank of America
Earnings at Bank of America, the second-largest U.S. bank, fell 32 percent after trading losses, defaults and writedowns cost almost $4 billion. Citigroup Inc., the biggest U.S. bank, on Oct. 15 reported a 57 percent decline in profit and said consumer lending will deteriorate this year.
Credit markets froze in July when the collapse of subprime mortgage trading led investors to shun bonds linked to home loans as well as debt for leveraged buyouts and commercial paper.
Two-year note yields have fallen about 30 basis points this week. The last time they had a bigger drop was in the week ended Sept. 2, 2005, when traders speculated the Fed would cut rates in the aftermath of Hurricane Katrina.
``Everyone's jumping into a flight to quality and into the short end,'' said Michael Franzese, head of government bond trading in New York at Standard Chartered. ``Bank of America's report sent everyone into a tizzy.''
Steepening Curve
The yield on the 10-year note fell 4 basis points to 4.52 percent, a four-week low. Yields move inversely to bond prices.
The note yields 58 basis points more than two-year notes, the widest since Sept. 28. A steepening in the so-called yield curve is further indication that investors expect the Fed to cut rates and are increasing their demand for short-term maturities.
Three-month bill yields fell 23 basis points to 3.76 percent, the lowest since Sept. 28. The Treasury today announced plans to sell $18 billion of the notes on Oct. 22. The offering is $2 billion more than the previous week.
In a sign that investors are concerned that the credit crisis may be spreading, the difference between three-month bill yields and the three-month London interbank offered rate increased for a third day to 145 basis points. The difference averaged 39 basis points in the first seven months of the year before reaching 240 basis points on Aug. 20, the highest since the stock market crashed in 1987.
Stocks Fall
Investors also sought the safety of government debt as the Dow Jones Industrial Average and the Standard & Poor's 500 Index fell and the risk of owning corporate bonds rose. The CDX North America Investment Grade Series 9 Index, a measure of the cost to protect bonds from default, climbed 3.5 basis points to 55.5 basis points, according to broker Phoenix Partners Group.
U.S. two-year notes yesterday rallied the most in five weeks after S&P cut ratings on $23.4 billion of mortgage securities and Deloitte & Touche LLP said a structured investment vehicle of London-based hedge fund Cheyne Capital Management Ltd. will stop paying debts.
``The whole credit situation is going to take over a year to play itself out, and we're only a few months into it,'' said Andrew Harding, who helps manage $16 billion as chief investment officer for fixed income in Cleveland at Allegiant Asset Management.
The two-year note's yield will be 4.03 percent by year-end, according to a Bloomberg News survey of 72 economists, with the most recent forecasts given the heaviest weightings.
To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net ; Deborah Finestone in New York at dfinestone@bloomberg.net .